TALK to the top management of any local company and venturing overseas is likely to be on their “to do” list as part of the strategic plan to grow the business.  

With globalisation, Malaysian companies, big and small, are looking at the world as their oyster – venturing overseas to expand their target sales markets, increase production capacity, lower production costs and diversify geographical business risks. 

The value of overseas mergers and acquisitions (M&As) involving Malaysian companies grew more than 40% per annum between 2004 and 2006 to RM21.8bil last year. 

Net direct investment abroad by Malaysians is also on the rise, with a 72% increase in 2006 to RM22bil. The momentum going into 2007 is encouraging with close to RM5bil in the first quarter alone.  

“We have been advising a growing number of Malaysian companies who are contemplating venturing overseas. The number has clearly been on the up-trend in the last three years,” said PricewaterhouseCoopers Advisory Services Sdn Bhd (PWC) senior executive director Tan Siow Ming.  

“The concentration of deals is in India, China and South-East Asia. The number of cross-border deals that we have worked on has more than tripled from 2004 to 2006.”  

Tan noted two separate waves of players venturing overseas.  

“In the big league, the large listed or private and Government-linked companies (GLCs) are into sectors that require larger investments such as telecommunications, energy, utilities, infrastructure, financial services and real estate development.  

“The second wave comprises Malaysian companies that are looking at smaller investments in manufacturing, oil and gas support services, retailing and services,” he said.  

According to him, the drive to go abroad for large conglomerates and GLCs is due to the limited growth potential in the country's mature domestic markets.  

The smaller Malaysian players, however, seek a regional footprint to leverage on lower labour costs or to access new markets for growth.  

However, as in all businesses, Malaysian companies venturing overseas have experienced some runaway success stories and some failures.  

A success story of overseas expansion is Lion Diversified Holdings Bhd's retail business under Parkson Departmental Store in China.  

The company now hopes to replicate its successful Chinese business model in Vietnam.  

A company spokesperson said Lion Diversified's expansion plans for the Parkson retail business in Vietnam had been progressing positively over the last two to three years.  

In mid-2005, Parkson opened its first store in Ho Chi Minh City, Vietnam followed by a second store in Hai Phong City in January this year. The third store opened in June in Ho Chi Minh City.  

“We invested about US$4mil to US$5mil for each store in Vietnam and are currently the only foreign-owned department store in Vietnam.  

“Although the Vietnam operations have not begun to contribute substantially to group revenue at the moment, we foresee a growth in its contribution in the near future,” the spokesperson said.  

Fortress Capital Asset Management (M) Sdn Bhd chief executive officer Thomas Yong said the country's saturated telecommunication sector had pushed Telekom Malaysia Bhd and Maxis Communications Bhd to venture into new markets in Asia.  

Maxis acquired a 51% stake in a greenfield celco (start-up mobile phone operator) PT Natrindo Telepon Selular in Indonesia in January 2005 for US$100mil.  

“Operating in Indonesia, however, has been difficult as regulatory issues delayed services roll-out and as a result, Natrindo is still making losses,” Yong said.  

However, he pointed out that not all foreign ventures were fruitless.  

In January 2006, Maxis acquired a 74% stake in Indian celco Aircel Ltd for US$800mil. Aircel has contributed positively to Maxis's bottom line since the day it was acquired.  

Yong highlighted the local gaming sector, which expanded overseas due to growth-restricting domestic regulations.  

He noted that the Genting group had acquired several British casinos amounting to RM5bil in investments, spent another RM6bil in Star Cruises and will spend a whopping RM11bil (when completed) on the Sentosa Integrated Resort in Singapore.  

“While the business rationale appears logical, the overseas ventures have yet to match its hugely successful domestic track record,” he said.  

Construction companies are another group that have moved offshore in a big way, as Malaysian construction activities slowed down in the last couple of years. The main shift has been to India and West Asia.  

Almost all the larger construction companies (WCT Engineering Bhd, Gamuda Bhd, IJM Corp Bhd and Zelan Bhd) have taken up overseas projects.  

Yong said banks had also expanded overseas but via investments into existing banking entities instead of setting up new operational start-ups.  

The CIMB group acquired a 51% stake in PT Bank Niaga, Indonesia, in 2002 for RM435mil.  

Public Bank Bhd similarly acquired a 100% stake in Asia Commercial Bank (ACB), Hong Kong, in 2006 for HK$4.5bil. ACB has been able to deliver tremendous loans growth of 24% in the first half of the year compared with Public Bank's domestic loan growth of 7.7%.  

This investment has been an immensely successful means for Public Bank to tap the fast-growing China market via Hong Kong.  

iCapital.biz Bhd chief executive officer Tan Teng Boo is calling for more Malaysian companies to spread their wings overseas. 

“The pace is still slow. There are many exciting opportunities outside Malaysia although the challenges could be huge. Smaller companies should also try to explore the overseas market to grow their business,” he said.

Multitude of new risk variables

MALAYSIAN companies must be ready to face a multitude of new risk variables in the pursuit of growing their business overseas, experts said. 

According to Fortress Capital Asset Management (M) Sdn Bhd chief executive officer Thomas Yong, the risks include the stability of legislative and regulatory treatment of foreign businesses in different countries, potentially different social behaviour of consumers, the degree of business competitiveness in new markets, operational difficulties in managing unfamiliar business counterparts and bureaucrats, currency risk and political risk.  

Hytex Integrated Bhd managing director Saw Kim Hock concurred. 

The garment manufacturer has faced many challenges in its bid to construct a factory in China since 2005. Despite promises by Chinese contractors of an eight to nine-month completion date, the China plant was delayed for two years (which is the usual construction period in Malaysia).  

“We faced difficulties in dealing with the local authority for various approvals in constructing the factory. We were unfamiliar with the local culture and habits of the Chinese. Bureaucracy also contributed to the delay of the China project,” Saw said. 

Challenges aside, the China plant has been fully operational since April and some renowned sports brands have started placing their Olympic orders with Hytex. 

“We envisage the business in China to be bigger than Malaysia in the near future. Our future business expansion will be in China,” Saw said. 

Yong pointed out that venturing overseas via acquiring existing successful businesses would reduce some of these risks.  

“The rewards, however, could be very much reduced, and may not be beneficial to investors as they could have similarly invested into foreign stocks on their own.  

“Investors should not view all foreign ventures positively. Good judgments are required to assess whether these companies are able to deal with the increased business risks and operational hazards to deliver the potentially higher investment returns,” he said. 

PricewaterhouseCoopers Advisory Services Sdn Bhd senior executive director Tan Siow Ming said winners tended to be players who had ventured abroad within their core businesses, worked well with a local partner, and done their homework on the foreign market.  

“We see that winners – especially on cross-border mergers and acquisitions (M&As) – have a robust due diligence performed before agreeing to final valuation and pricing, and the discipline to do deals that are consistent with the acquirer's strategic goals.  

“We have seen Malaysian companies succeed in a variety of sectors such as telecommunications, energy, infrastructure, oil and gas (O&G) support services, plantations, manufacturing and even retailing in various markets, from the Middle East to China,” he said.  

Tan noted that losers tended to invest in places with high country risk (sometimes translated into exotic locales) in sectors where visibility of the expected market return for their investments was low and to diversify into non-core competencies.  

“More often than not, it is simply due to poor deal execution,” he said. 

Diversifying into non-core competencies and a lack of research into its investment were main reasons why O&G support services provider Kejuruteraan Samudra Timur Bhd's (KSTB) venture into natural gas exploration in Canada was unsuccessful.  

KSTB's Canadian venture started in June 2004 but the company cut its losses and stopped exploration in less than a year when it discovered that the gas find was insufficient for commercial production. This resulted in a full impairment loss of about RM8mil. 

Construction group PECD Bhd also faced many challenges overseas, especially in Sudan. 

Group chief executive officer Rosman Abdullah said: “The challenges have impacted the group’s financial performance abroad. Nonetheless, we are aggressively pursuing our claims on variation orders as well as those provided for in the contractual agreement for the Sudan Marine Terminal and Dubai International Financial Centre projects.” 

The group has placed greater emphasis on risk management as well as better financial and cost controls and manpower planning, all of which were not adequately addressed in the past. 

PECD is currently undertaking projects worth over RM1.3bil. PECD’s unbilled order book to date stands at RM640mil, with overseas projects representing close to 60% of its order book.

Overseas ventures boost earnings for some

IT seems fashionable these days for local companies to venture into the overseas market. Facing saturated markets at home, they are encouraged to go abroad to explore business opportunities.  

Analysts said some companies' overseas ventures had boosted their corporate earnings last year. 

“Malayan Banking Bhd, Public Bank Bhd, Telekom Malaysia Bhd and IJM Corp Bhd are among those which have successfully taken on the world stage,” an analyst said, adding that the smaller companies were not left behind. 

“Smaller companies seem to pursue a path of overseas expansion as well. The saturating markets at home have prompted these companies to venture abroad.” 

A local bank-backed analyst said the majority of those that had ventured overseas over the past two years were rushing towards India and China to ride on the countries' economic boom. 

However, he said, more and more companies were also heading towards Vietnam and West Asian countries. 

“There are more Malaysian foreign direct investments, ranging from manufacturing operations in Thailand, Vietnam and China to toll and airport concessions. 

“Over the past few years, Malaysian businesses have been investing more than RM10bil annually overseas,” the analyst noted. “Local companies that have successful overseas projects have gained from the positive publicity and seen a boost in their earnings performance and reputation.” 

Another analyst said that it was not all smooth sailing for these companies which had made a name for themselves overseas.  

“There have been some disappointments after fruitless attempts in their overseas forays.” 

SJ Securities head of research Cheah King Yoong said aside from being a reputable local construction player, IJM had also been successful in its overseas forays, particularly in India where it had undertaken sizeable construction projects. 

He said that although the group had ventured into India for quite some time, the company had only started doing business in a big way over the past few years. 

IJM ventured into India in 1998 with the Mumbai Pune Expressway and has successfully completed 11 road projects. It has diversified into metro construction and developed an integrated residential township project in Hyderabad.  

Meanwhile, IJM has plans to make a foray into Pakistan this year, with the Karachi Elevated Highway project, according to OSK Investment Bank. 

For the financial year ended March 31, the company made a 14% rise in pre-tax profit to RM318.9mil on revenue of RM2.3bil. Analysts said currently more than half of its revenues were derived from overseas projects. 

Cheah said another company which had made it big beyond local shores was UMW Holdings Bhd. . 

UMW has operations in Singapore, Thailand, Vietnam, Myanmar, Papua New Guinea, China, Australia, Turkmenistan, India, Indonesia and the Middle East. 

Analysts said despite all the successful stories, there were also less successful overseas ventures and these companies learned the process the hard way. 

UEM World had made a full provision for the millions it lost in its venture to the Middle East while Sime Darby had to write off a huge provision for bad debts in China in 2005. 

Quite a number of construction companies, including IJM, Gamuda Bhd, Road Builder Holdings Bhd, WCT Engineering Bhd and Mudajaya Corp Bhd, are exporting their expertise overseas, the most popular destinations being India, China and countries in the Middle East and South-East Asia. 

“KNM Group, Dialog Group Bhd, LCL Corp Bhd and UMW are also actively expanding their operations abroad,” an analyst said. 

The trend of Malaysians investing abroad is expected to continue into the future.  

An analyst pointed out that more Malaysian companies were listing overseas, particularly for their overseas subsidiaries, as it would be seen as a natural progression to expand their businesses abroad. 

Overseas expansion would be necessary in the long run, as the local playing field is getting flooded with players, an analyst said. 

However, for some companies, opportunities at home have certainly not dried up. 

Analysts say, local companies were also eyeing the projects under Ninth Malaysia Plan. 

Local construction players have been urged by the Prime Minister to merge and form bigger entities that would be able to bid for jobs overseas. 

We needed to diversify our income base since the Malaysian market is of limited size. It is also about spreading our risks across markets rather than be exposed to a single market.  

We have ventured into countries such as Hong Kong, Vietnam, Australia, China and the Philippines. In general, we have been happy with our progress; but some countries have been tougher than others. In the Philippines we struggled with the culture and ways of doing business, but in places like Australia, we have emerged as Malaysia’s largest real estate investor. In Australia, we have probably invested a total of about RM300mil to RM400mil, which has now become about RM3bil in total assets, contributing about 70% of our revenue and profit. 

Thus far, our expansion into China, Indonesia, Australia, the United Arab Emirates (UAE) and Italy has progressed as planned and we continue to expand.  

We have invested about RM195mil over the last four years and have increased our market share to about 1% for the year ended Dec 31, 2006. Our overseas business contributes about 45% to revenue and 28% to profit in the first quarter of the year. We are now engaged in constructing new plants in Brazil and Canada and seek further expansion in the UAE, China and Batam. Human capital is a major challenge to our expansion plans and we have established a subsidiary in India to recruit Indian engineers. 

Apart from our manufacturing activities in Malaysia, we have one plant each in China and Thailand to produce garbage bags. We have been operating from these two countries for seven years.  

Although we have been exporting to more than 40 countries, we are constantly looking for opportunities in new markets. Export sales currently account for about 70% of the group's revenue. 

We started exporting our garbage bags to Japan in 1993. Today, we export about 160 containers of garbage bags to Japan monthly from our plants in Malaysia and China. 

We are also looking to invest in a garbage bag manufacturing facility in Vietnam this year. We hope to start construction by the end of this year and manufacturing activities will begin early next year.